THE FIRST-TIME HOMEBUYER CREDIT IS ANOTHER MONUMENT TO TAX EFFICACY

Posted for your perusal at http://www.treas.gov/tigta/auditreports/2010reports/201041069fr.pdf the Treasury Inspector General for Tax Administration (“TIGTA” for you acronym mavens) has just issued a report titled Additional Steps Are Needed to Prevent and Recover Erroneous Claims for the First-Time Homebuyer Credit. It reveals some startling facts, including:

· TIGTA estimated that at least 1,295 incarcerated persons received refunds totaling more than $9.1 million for fraudulent Homebuyer Credits claimed on their 2008 tax returns.

· Multiple claims exceeding the maximum homebuyer credit were paid for the purchase of the same home: 18,832 taxpayers filed claims for the Homebuyer Credit using a total of only 7,695 addresses.

· Despite the fact that the credit was available only for homes purchased after April 8, 2008, 2,751 claims filed on tax year 2008 electronic tax returns totaling almost $18.8 million were based on homes reportedly purchased prior to April 9, 2008, with 748 claims (27 percent) as to which the acquisition date reported by the taxpayer was in 2007 or prior.

· 87 IRS employees claimed the credit despite indications that they were ineligible because they owned a home within the last three years.

All told, according to the Tax Policy Center, TIGTA concluded that 14,132 people received erroneous credits totaling $17.6 million.

At the same time, tax geeks are talking about “tax expenditures” and whether there are too many of them. What, you ask, is a “tax expenditure?” Why, it’s a provision of the tax code, like (just to pick one at random) the deduction for interest paid on home mortgages, that reduces the total tax paid by taxpayers. Isn’t that an interesting characterization of a tax deduction? I sure think so. Calling a deduction a “tax expenditure” makes it sound like money that the government is spending, not money that it isn’t collecting. A recent article in the Dallas Morning News titled, tellingly enough, “Tax Breaks American Savor Are Costing Uncle Sam Big,” characterized tax deductions just that way:

The mortgage interest deduction is the third-most- expensive tax break, estimated to cost only slightly less than the tax treatment of employer-sponsored health care ($110 billion) and 401(k) retirement plans ($106 billion), according to figures from the Congressional Joint Committee on Taxation.

Added together, the more than 200 tax breaks [in the Internal Revenue Code] will cost the federal government about $1.1 trillion this year – about $200 billion less than the budget deficit. They are also known as tax expenditures, because they work just like other government expenditures.

The huge number of deductions, many of which were inserted in the tax code as favors to particular constituencies, is indisputably a major contributor to the crushing complexity of the tax code. But to say straight out that deductions “work just like other government expenditures” suggests a governing philosophy in which money not taken by the government equals money spent by the government. In fact, it sounds an awful lot like Congressman Rangel’s statement to the effect that not taxing something is the equivalent of subsidizing it (see my June 2009 Special Report). Is that really the baseline from which tax policy should originate?

So on the one hand, Congress gave a targeted tax break meant to help real estate interests that was poorly administered and resulted in substantial losses of government revenue, while on the other hand, long-established deductions like home mortgage interest and 401(k) retirement plans are characterized as “just like government expenditures.” We all know that the tax code is too complex, and that government expenditures are way out of balance with government revenues, but it sure doesn’t sound like Congress has a coherent strategy for doing anything about either problem.

MY (UV, NOT SPRAYED-ON) TAN IS GETTING TAXED,

BUT AT LEAST NOW I KNOW WHO “SNOOKI” IS

Remember the “tan tax” (see my December, 2009, Report)? It replaced the “botax” as a “revenue enhancer” for the recently enacted federal health insurance reform bill. You probably forgot all about it. Well, the folks at the IRS not only didn’t forget about it, but have been hard at work writing regulations to implement the tax. Here’s a sample:

(a) Overview. This section provides rules for the tax imposed by section 5000B on any indoor tanning service. (b) Imposition of tax–(1) General rule. Tax is imposed by section 5000B at the time of payment for any indoor tanning service.

(c) Definitions–(1) Indoor tanning service means a service employing any electronic product designed to incorporate one or more ultraviolet lamps and intended for the irradiation of an individual by ultraviolet radiation, with wavelengths in air between 200 and 400 nanometers, to induce skin tanning. The term does not include phototherapy service performed by, and on the premises of, a licensed medical professional (such as a dermatologist, psychologist, or registered nurse).

See how easy they make it to apply what sounded like a straightforward 10% tax on tanning? Piece of cake, right? A June 11 post on the TaxProf Blog linked to a June 10, 2010, news item reporting that “Snooki” doesn’t go tanning anymore because of the 10% tax. Snooki, didn’t anyone tell you to just go for the sprayed-on stuff? Who is “Snooki,” you ask? She’s a member of the cast of MTV’s “Jersey Shore,” of course. Did you just get back from a two-year trip to Mars, or what?

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